There is quite a bit of uncertainty around the Basel III Endgame proposal moving forward, however the one thing that is nearly certain is that the rule will not be implemented by the July 2025 deadline, according to Peter Ryan, Managing Director and Head of International Capital Markets and Strategic Initiatives, SIFMA.
Speaking on the latest episode of The SIFMA Podcast: Why the Basel III Endgame Must be Re-Proposed, he said that the banking agencies proposed the Basel Endgame rule last July, with the comment period on the proposal ending on January 16, 2024.
“The response was overwhelmingly critical,” he said.
According to Ryan, the proposal would significantly increase capital requirements, particularly for banks’ capital markets and trading activities.
“In fact, the latest industry quantitative impact study estimates that capital for large banks’ trading activities would increase by 129% over their current historically high levels,” he said.
Ryan added that it will have a major impact given how critical the U.S. capital markets are to U.S. economic activity, funding: “As you know, three-quarters of equity and debt financing for corporations and facilitating prudent business risk management by a wide variety of end-users.”
The result of these sweeping capital increases would be reduced availability of key services and higher transaction costs for businesses, consumers, and government entities, a fact that was highlighted in the hundreds of critical letters on the proposal, he said.
Ryan mentioned the PwC study, which evaluated the macroeconomic and microeconomic impacts of the Basel Endgame proposal.
Speaking on the findings, he said that the study found that an increase in capital requirements will lead to reduced lending, higher borrowing costs, and reduced access to risk management tools such as derivatives hedging.
“The PWC study also observes that the proposal would raise the costs of certain types of transactions for U.S.-based institutions in ways that would not apply to firms operating overseas,” he said.
“This, in turn, would undermine the entire point of the Basel standards, which is to ensure that there are broadly consistent global capital requirements in place for large banks,” he said.
“And because of this divergence, the U.S. proposal would also create a misalignment of risk, with capital requirements for the many types of risks differing across jurisdictions,” he added.
“In our view, a better approach would be to make the necessary reforms to the different risk-based frameworks in a broadly capital neutral manner,” he stressed.
According to Ryan, it appears that some leading regulators have heard these concerns. He gave an example of July testimony by Federal Reserve Chair Jerome Powell. He also mentioned FDIC Vice Chairman Travis Hill, who said the Basel III Endgame needed to be amended in “broad, material, and rational” ways, and that the only way to do that was through a complete re-proposal for public comment.
Ryan said: “We don’t know exactly if or when a re-proposal of the rule will be published, or what form it will take. But we continue to believe the most prudent path is a full re-proposal of the Basel Endgame that covers all the so-called “risk stripes” in the proposed framework, including credit, operational, and market risk.”
He further said that a full re-proposal is also the best way to ensure that there is broad consensus around the final rule and will help ensure that it is a framework that is built to last.
“It’s also crucial that the banking agencies consider first whether the U.S. banking system really needs significantly more capital beyond current levels (and if so, how much more is required)? and then second, what are the relative costs and benefits to the broader economy, businesses and consumers of making these changes? That’s crucial here, because the real-world economic costs of getting this wrong are just too high,” he concluded.
